When people think about working with a financial advisor, they usually think of one thing - investments. But many people usually do not realize that there are more important factors to focus on besides what investments can provide the highest returns. The focus should be on those you can control and how they apply to and affect your long-term financial plan.
Too many advisors, especially if they are not a CERTIFIED FINANCIAL PLANNERTM, generally focus on the investments first, which seems backwards to me. It is like planning a road trip and trying to decide what vehicle (plane, train, automobile) to take to get there, before you have any idea of where you are going. Doesn’t make much sense, does it?
In my opinion, the dominant factor is figuring out what is most important to YOU. It is something that unfortunately does not get discussed enough by people sitting on my side of the table. Focusing on what is important to you and your family will lead to the creation of specific financial goals, which will then direct the approach you take in creating your financial plan.
Once you decide where you are going, you can then turn your attention to what is going to help you get there. Again, it is not your investments – but factors you have complete control over, the main three (3) being your:
- Current and future cashflow needs
- Current and future expenses
- Savings & Contributions
Focusing on these will help increase your chances of your long-term financial plan being a success and are designed to, allow you to reach your goals in retirement.
You may be thinking to yourself, “well if I can outperform the market by 2% percent a year, why does it matter? I’ll have plenty to live off if I get those returns.” Maybe, but it reminds me of the story of the two old men on a park bench.
Let me explain:
- Two elderly gentlemen are sitting on a park bench chatting about their investments and one says to the other, “I outperformed the market by 2% a year...pretty impressive, yes?”
- The other gentlemen says, “That’s great, I only matched the markets returns…that must be why I ran out of money five years ago when I was 80.”
- The first gentlemen says, “Well, that’s too bad. Hey, I’m 85 yrs. old also…
- Second gentlemen says, “You must be doing pretty well by outperforming the markets by 2% per year?”
- First guys says, “I ran out of money at 84”
The reality, in neither case did the return earned by the portfolio determine the real-life financial outcome…they are both broke at 85.
Why is this?
The short answer - they focused solely on investment performance and not on the factors they could control. They both did not realize that their current spending habits were too high and no matter what their return was it could not keep up with the way they were living.
It is unfortunate that many people have the mindset that the only thing that matters is getting the highest return, including people in our industry. They tend to focus solely on the percentage return they can get instead of what is truly important to one’s long-term success.
It is even scarier to think that so few financial advisors have the CFP® certification. A certification that holds them to a higher standard (fiduciary standard) in which they must go through the planning process with every client. I am not saying that if they do not have a CFP® certification they are not doing planning, although only few in the industry do. This is an issue to be discussed later.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
Melone Private Wealth, LLC (“Melone Private Wealth”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Melone Private Wealth and its representatives are properly licensed or exempt from licensure.
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